Don’t Cross the Streams
ConocoPhillips recently announced its fourth quarter results that sagged on lower Canadian heavy oil and natural gas prices and stagnant production. Excluding extraordinary items, the company’s income dropped by 14.3% from $2.1 billion to $1.8 billion. Production rose slightly to 1.607 million barrels per day versus 1.60 million in the previous quarter. In the current quarter, ConocoPhillips is expecting a slight dip in output to between 1.58 million and 1.60 million barrels per day.
The issue for ConocoPhillips is that it is still facing potential cash shortfall versus its production and exploration. The continued disconnect between U.S. and international oil prices is a classic double-edged sword now that ConocoPhillips has split off its downstream business. Whereas Shell or Chevron Corporation (NYSE:CVX) can count on revenue from one offsetting lower selling prices in the other, creating a less volatile overall business, Conoco cannot do that. What is difficult for the company’s stock is a boon to investors, giving them the flexibility to allocate investment capital based on the current environment.
While ConocoPhillips’s net income for 2012 dropped by 16% to $6.73 billion, Phillips 66, which started out in May 2012, increased its adjusted income for the past twelve months by exactly 50% to $5.39 billion. The biggest boost came from refining, where earnings (excluding marketing) increased by 91.6% to $3.78 billion from $1.97 billion in 2011.
The Dollar-Oil Conondrum
I expect to see oil prices continue to be well bid as central banks attempt to prop up money flow with more quantitative easing measures until their economies either take off or completely crater. Either way, money will preferentially flow into the highest demanded commodities – food and energy. We are seeing this now. Even though there are fears of economic slowing in the U.S. and the data out of Europe looks awful, the price of both West Texas Intermediate and Brent crude remains well bid and near the top of their respective trading bands, indicative of hot money flow trumping economic fundamentals. The same thing is happening with stocks; as bond prices are supported by the Federal Reserve, money is flowing into stocks searching for yield.
In this type of environment both upstream and downstream producers become the equivalent of a higher yielding TIP security as inputs will remain high but demand will be sufficient enough to keep margins constant if low.
| COP | PSX | CVX | RDS.A | |
| Stock 6M | -0.64% | +50.03% | +2.04% | -7.20% |
| P/E | 8.5 | 9.9 | 8.6 | 7.7 |
| EPS | $6.72 | $6.48 | $13.32 | $8.48 |
| Yield | 4.6% | 1.6% | 3.1% | 4.7% |
| ROE | 13.2% | 18.8% | 20.5% | 14.9% |
The article ConocoPhillips’ Asia Strategy Hedges Dollar Risks originally appeared on Fool.com and is written by Peter Pham.
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